Chapter 8

Question 1

3 reasons why sounds financial planning is important

Answer 1

1. If your revenues exceed your costs, the result is financial happiness. But if costs are greater than revenues, financial misery ensues. 2. Financial forecasts hold up a mirror to a start-up’s strategic assumptions about how it intends to create, deliver and capture value. This can lead to a feasibility study. 3. Financial plans allow you to access money from external financiers.

Question 2

What 3 questions does financial planning allow you to answer

Answer 2

What is the plan for growth? What does the start-up lack? Is the start-up viable?

Question 3

Four basic factors

Answer 3

What the customer is willing to pay, Competitor pricing, What the good or service costs to produce, The volume of customers

Question 4

Value-based pricing

Answer 4

pricing based on value offered

Question 5

decoy

Answer 5

a distracting product to make people buy another specific product or size more.

Question 6

Price skimming

Answer 6

early adaptors pay more and when demand drops, decrease the price.

Question 7

penetrating prices

Answer 7

lower prices to attract customers.

Question 8

problem with lower pricing

Answer 8

Harder to increase, may give the view it is less valuable, and can cause big competitors to start a price war which they will win because of (deeper pockets and lower costs).

Question 9

Cost-plus

Answer 9

calculating the costs of a good or service and adding a profit on top.

Question 10

profit margin

Answer 10

((profit/price) × 100)= profit margin percentage)

Question 11

mark-up

Answer 11

((profit/cost) × 100)

Question 12

what is the problem with cost plus

Answer 12

people often forget alot of expenses such as living, sales and marketing and postsales cost (returns, customer care).

Question 13

what is best to do if the customer niche is small

Answer 13

focus on differentiation instead of costs

Question 14

factors influence how new entrepreneurs construct a first-year revenue model

Answer 14

What price should they charge?, Is their pricing aligned to their value proposition?, How do organisational capacity constraints limit customer volumes?, How long does it take to inform, educate and sell to customers?, Is the offer seasonal?

Question 15

what can you do beside the expect case revenue and why

Answer 15

you can do best and worse scenario to prepare for eventualities and show potential investors that you have tought about changing scenarios

Question 16

four main options for organic growth

Answer 16

1. Market penetration: Sell more of their existing products or services to their existing customers
2. Market development: Sell their existing products to new customers,
3. Product or service development: Develop new products for their existing customers,
4. Diversification: Develop new products for new customers. (Option 1 is the least risky option for many start-ups. In contrast, option 4 is essentially a brand new start-up)

Question 17

what are other ways to grow businesses

Answer 17

franchising the business and acquiring other businesses

Question 18

what are some obstacles for fast growth with franchises

Answer 18

It takes time to set up the agreement, Franchisees need time to set up their franchise, The franchisor has to demonstrate a track record of strong revenue growth, and It takes time to build a network of franchisees.

Question 19

three main types of specimen launch costs

Answer 19

regulatory costs, pre-launch operational costs incurred to get the product or service ready and personal costs.

Question 20

costs are recurring

Answer 20

accountant and a lawyer, Sales and marketing, stock, buying or leasing capital equipment, warehousing and logistics. (maybe some extra capital for occurring problems)

Question 21

what is a P&L statement (income statement)

Answer 21

a summary of revenues, costs and profits for a given period. ( At the top is revenues next costs that change, depending on how many goods or services are sold)

Question 22

variable costs

Answer 22

Cost Of Goods Sold (COGS).

Question 23

gross profit

Answer 23

Revenues − COGS

Question 24

Fixed costs (operating expenses or overhead costs)

Answer 24

costs that do not change with revenues.

Question 25

Four forms of fixed costs

Answer 25

1. Total sales and marketing costs, 2. Total general and administrative costs (rent, insurance, utillity), 3. Total personnel costs, 4. Total product development costs (design, test, patent)

Question 26

Operating profit

Answer 26

Gross profit − fixed costs

Question 27

EBITDA (operating profit)

Answer 27

Earnings Before Interest is charged, Taxes are paid, or account taken for Depreciation or Amortisation

Question 28

Profit before tax

Answer 28

EBITDA − Interest + Depreciation + Amortisation

Question 29

Amortization

Answer 29

a financial adjustment for spreading the cost of intangible assets such as patents over their lifetime of use

Question 30

Depreciation

Answer 30

a financial adjustment for spreading the cost of tangible assets such as a car, equipment over their lifetime of use

Question 31

Break-Even Point (BEP)

Answer 31

The level of sales (how many units and at what price) a business needs to have to cover its costs and become profitable.

Question 32

To calculate BEP, you can use two formulas

Answer 32

1. Number of sales to reach BEP = total fixed costs/gross profit percentage. 2. Number of units that have to be sold to reach BEP = total fixed costs/(price of product − contribution cost of product (variable costs)).

Question 33

valley of death

Answer 33

the time it takes to reach the point at which business losses are zero.

Question 34

cash flow statement

Answer 34

For a given period, it records when cash came in, when it went out and what is left over.

Question 35

Difference cash flow and P&L

Answer 35

1. Depreciation/amortisation is not included in the cash flow. 2. Capital introduced such as founder’s own savings, bank loan and equity investment is included. 3. Both sales and costs in the cash flow are entered when they are paid instead when services and products are delivered (p&l kinda better because its more guaranteed and couples cost and revenue).

Question 36

what is lifetime span of depreciation

Answer 36

10 years.

Question 37

are purchased capital equipment on p&l

Answer 37

no its on cash flow but the depreciation is on p&l.

Question 38

total cash flows in

Answer 38

Capital introduced + revenues

Question 39

total cash flows out

Answer 39

COGS+ fixed costs + capital expenditure

Question 40

why is cash important

Answer 40

even if the business is heading or projection towards profit if it can’t survive the initial cost and bad months it won’t survive to make the profitable time.

Question 41

options to solve cash flow issues

Answer 41

1. Introduce more capital into the business, 2. Reduce the cash ‘burn rate’ by improving cash management, 3. Ask suppliers for more time to pay.

Question 42

creditor strain

Answer 42

suppliers, if they have to wait for too long for their money, might decide to stop supplying the start-up.

Question 43

why are cash flow statements essential

Answer 43

They show when a business will reach cash flow positive, help with monitoring the cash burn rate and are pivotal in addressing over-spending.